Interactive Investor

ii view: Ocado details retail growth and keeps full-year forecasts

Opening new robotic fulfilment centres and deepening its collaboration with Marks & Spencer. We assess prospects.

19th September 2023 11:38

by Keith Bowman from interactive investor

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Retail business third-quarter trading update to 27 August

  • Retail revenue up 7.2% to £569.7 million
  • Active customer numbers up 1.5% 961,000

Retail chief executive Hannah Gibson said:

"It has now been a year since I joined Ocado Retail and in January we set out our Perfect Execution strategy, making sure every element of our customer proposition and our operating model is at its best. We are delivering on this plan and have great momentum in the business, with revenue growing faster in Q3 than in H1.

“We continue to deepen our collaboration with M&S, including hundreds of new M&S lines set to launch in the Autumn. Together with our partners, we are intent on bringing even lower prices, more choice, and greater convenience to our customers.”

ii round-up:

Food delivery and technology company Ocado Group (LSE:OCDO) today detailed a rise in quarterly sales at its retail business as well as reiterating the division’s full-year forecasts. 

Third-quarter sales at its 50:50 joint venture business with Marks & Spencer (LSE:MKS) rose 7.2% to £569.7 million, with a return to positive volume growth made over the last month of the quarter to late August. 

Shares in the FTSE 100 company rose by more than 3% in UK trading having come into this latest news up by just over a quarter year-to-date. That’s similar to Sainsbury (J) (LSE:SBRY) shares, although a long way from the 83% gain made by Marks & Spencer shares. The FTSE 100 index itself is up by close to 3%. 

Active Ocado customers climbed 1.5% year-over-year to 961,000, with the number of mature customers - defined as those who have made five shops - growing 6.6%. 

The trading update came as Ocado starts operations at a new robotic customer fulfilment centre in Luton. The new centre will help it double productivity compared with its first-generation site in Hatfield. 

The average basket value rose 4.2% to £120.72, while the average basket size in terms of items purchased declined to 44 from 45 in the third quarter of 2022.

Ocado continues to expect full-year Retail revenues to grow by a mid-single-digit amount, with adjusted Retail profit (EBITDA) tipped to come in marginally positive. 

A fourth-quarter trading update is scheduled for 16 January. 

ii view:

Ocado operates three divisions of Technology Solutions, Retail and Logistics. Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer; Ocado Logistics supports both Ocado Retail and Morrisons in the UK; Technology Solutions is responsible for helping other retailers with their online offerings, both in the UK and overseas, using its Ocado Smart Platform (OSP) software and robot technology. Its own UK Retail division is an OSP user. 

Analysts broadly break the Ocado business and its prospects into three areas: its UK Retail business; the valuation of contracts around its Solutions business; and expectations of new Solutions contracts. 

For investors, group-wide pre-tax losses over recent years should not be forgotten. Costs for businesses generally remain elevated, retail rivals are busy enhancing their own online and delivery operations, while the lack of a dividend contrasts with yields of over 4% at both Tesco (LSE:TSCO) and Sainsbury's. 

On the upside, sales at both Retail and Technology Solutions are growing. A high focus on costs persists, there have been rumours regarding takeover interest from Amazon, while an estimated price-to-net asset value ratio of 3.5 times compares to a three-year average nearer to nine times, suggesting improved value. 

For now, and while Ocado shares remain volatile and speculative, an established consumer appetite for online shopping and delivery, along with an analyst consensus estimate of fair value at around 925p per share, should be enough to keep long-term investors interested. 

Positives: 

  • Efficient technology-based packing of customer orders
  • Growing number of solutions related customers

Negatives:

  • Loss making
  • Not paying a dividend

The average rating of stock market analysts:

Strong hold

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